margins - What We're Reading - StockBuz2019-05-25T15:00:30Zhttp://stockbuz.net/articles/feed/tag/marginsMacro And Credit - Bucklinghttp://stockbuz.net/articles/macro-and-credit-buckling2018-03-17T16:15:03.000Z2018-03-17T16:15:03.000ZStockBuzhttp://stockbuz.net/members/1t2xbcvddkrir<div><div style="text-align: justify;"><span style="font-family: inherit;">Watching with interest the slowly grind higher in US interest rates with some weakening signs coming from US economic data such as the US trade deficit in goods getting spanked with orders for larger domestic appliances and other durable goods falling by a cool 3.7% from the month before, led by a hard drop in vehicle demand, when it came to choosing our title analogy for this week's conversation we reminded ourselves of "buckling" being a mathematical instability that leads to a failure mode.&#160;When a structure is subjected to compressive stress, buckling may occur. Buckling is characterized by a sudden sideways deflection of a structural member. This may occur even though the stresses that develop in the structure are well below those needed to cause failure of the material of which the structure is composed. As an applied load is increased (US interest rate hikes) on a member, such as a column, it will ultimately become large enough to cause the member to become unstable and it is said to have buckled.&#160;Further loading will cause significant and somewhat unpredictable deformations, possibly leading to complete loss of the member's load-carrying capacity. If the deformations that occur after buckling do not cause the complete collapse of that member, the member will continue to support the load that caused it to buckle. If the buckled member is part of a larger assemblage of components such as a building, any load applied to the buckled part of the structure beyond that which caused the member to buckle will be redistributed within the structure.&#160;In a mathematical sense, buckling is a bifurcation in the solution to the equations of static equilibrium. At a certain point, under an increasing load, any further load is able to be sustained in one of two states of equilibrium: a purely compressed state (with no lateral deviation) or a laterally-deformed state. Obviously we thing that financial markets have reached a bifurcation point and we have yet to see how the buckle of rising interest rates will be redistributed within the complex structures without leading to some renewed avalanche in some parts of the markets.</span></div>
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<div><span style="font-family: inherit;">In this week's conversation, we would like to look at the vulnerability of equities and credit markets to a more hawkish tone of the Fed which would lead to more aggressive rate hikes should the "Big Bad Wolf" aka inflation continue to rear its ugly head.&#160;&#160;</span></div>
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<div style="line-height: 20.8px;"><strong><u><span style="font-family: inherit;">Synopsis:</span></u></strong></div>
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<li style="line-height: 20.8px; text-align: justify;"><strong><em><span style="font-family: inherit;">Macro and Credit - Hike it till you break it</span></em></strong></li>
<li style="line-height: 20.8px; text-align: justify;"><em style="line-height: 20.8px;"><strong><span style="font-family: inherit;">Final chart - Afraid of buckling? Watch credit availability</span></strong></em></li>
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<div style="text-align: justify;"><span style="font-family: inherit;">In our March 2017 conversation entitled "<a href="http://macronomy.blogspot.com/2017/03/macro-and-credit-endless-summer.html">The Endless Summer</a>" we concluded our missive at the time asking ourselves how many hikes it would take before the Fed finally breaks something. Given the arrival of a new Fed "sheriff" in town one might wonder if the pace will be as gradual as it seems should the Fed feels it is falling behind the curves when it comes the "Big Bad Wolf" aka inflation and current loose financial conditions. As we pointed out in our recent conversations the recent uptick in inflation coincided with a sharp sell-off in equities. Sure, one would point out to us that correlation doesn't mean causation, but, it certainly felt like the very crowded short-volatility complex was looking for a match that triggered the explosion and for some their ultimate demise.&#160; The&#160;U.S. Average Hourly Earnings<span style="text-align: left;">&#160;triggered the "buckling" as it brought back the fear in the markets of the return of</span> the Big Bad Wolf aka "inflation".&#160; For some it seems like us, it seems the "Big Bad Wolf" has already blown apart the "short vol" pig's house which was made of straw. If indeed the short-vol house was made of straw we wonder if the pig's equities markets house is made of sticks or and if the pig's credit markets house is made of bricks. The difficulty for the Fed in the current environment is the velocity of both the rates rise and inflation, because if indeed the Fed hike rates too quickly then it will trigger some other avalanches down the capital structure (short-vol complex being the equity tranche or first loss piece of the capital structure we think). If inflation and growth rise well above trend, then obviously the Fed will be under tremendous pressure to accelerate its normalization process. It is a very difficult balancing act.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">When it comes to the bounce back for equities following the short-vol avalanche, which could have been possibly triggered by the recent uptick of inflation, we read with interest Deutsche Bank's Asset Allocation note from the 23rd of February entitled "Inflation and Equities" with the long summary below:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>The recent uptick in inflation coincided with a sharp correction in equities</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">Whether this was cause and effect is debatable for a variety of reasons and around half the correction reversed quickly (Stretched Consensus Positioning, Jan 31 2018; An Update On The Unwind, Feb 12 2018). Nonetheless, late in the business cycle with a tight labor market, strong growth, a lower dollar, higher oil prices and a fading of one off factors, all point to inflation moving up. What does higher inflation mean for equities? We discuss five key questions.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>Is inflation bad for margins and earnings? Historically, higher inflation has been&#160;</strong><strong>associated with higher margins and strong earnings growth</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ Conceptually, higher inflation is ambiguous. From a pricing vs cost perspective, whether higher inflation leads to higher or lower margins depends on the relative strengths of price vs wage and other input cost inflation. It depends on the relative importance of variable vs fixed costs. And on the extent to which corporates can increase productivity in response to cost pressures. <strong><span style="color: red;">It is notable that while markets seem to have been surprised by the recent uptick in wage inflation, corporates have been noting it for at least a year</span></strong>. Finally, inflation does not occur in a vacuum. The drivers of higher inflation matter and when it reflects strong growth, it implies not only higher sales but operating leverage from fixed costs can raise margins and amplify the impact on earnings.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong>Historically, the empirical evidence is unambiguous</strong>. Higher inflation was clearly associated with higher margins and strong earnings growth.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><strong><span style="font-family: inherit;">Does higher inflation mean lower equity multiples? By how much? A 1 pp rise in inflation compresses equity multiples by 1 point or a decline in prices of around 5% from recent pre-correction levels</span></strong></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ The correlation between bond yields and equities depends on the driver: inflation (-) or real rates (+). Contrary to popular notions that higher bond yields mean lower equities, the historical relationship between bond yields and equities has been ambiguous (Long Cycles In The Bond-Equity Correlation, May 2014). Instead, the impact of higher yields on equities depends on whether they reflect higher inflation (-) which has always been negative for equities; or whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels (greater than 4%--seen only once during the Volcker disinflation) (Do Higher Rates Mean Lower Equity Multiples? Sep 2014).</span></blockquote>
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<blockquote class="tr_bq"><span style="font-family: inherit;">■ Why is higher inflation negative for equity valuations? When inflation moves up, the hurdle rate for all nominal investments moves up and in turn bond yields and earnings yields (inverse of the equity multiple) move up.</span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ A 1pp rise in inflation compresses multiples by 1 point. A majority (70%) of the historical variation in the S&amp;P 500 multiple is explained by its drivers: earnings/normalized levels (-); payouts (+); rates broken up into inflation (-) and real rates (+); and macro vol (-). Our estimates imply that a 1pp rise in inflation lowers the equity multiple by 1 point or a 5% decline in prices from the recent peak. Our house view and the consensus sees a somewhat smaller rise in inflation over the next 2 years. These ranges of increases in inflation imply a modest pullback in equities that would put it within the bands of normal 3-5% pullbacks that have historically occurred every 2-3 months.</span></blockquote>
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<blockquote class="tr_bq"><span style="font-family: inherit;"><strong>Is the inflection in inflation a leading indicator of the end of the cycle? How long&#160;</strong><strong>is the lead? On average 3 years, but the Fed’s reaction is key</strong></span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">With an average correction in equities of 21% around recessions, the timing of&#160;the next one is obviously key. <strong><span style="color: red;">If the recent uptick marks the typical mid- to latecycle&#160;</span></strong><strong><span style="color: red;">inflection up in inflation, how long after did the next recession typically&#160;</span></strong><strong><span style="color: red;">occur? On average 3 years, which would put it in late 2020</span></strong>. But the timing is&#160;likely determined critically by the Fed’s reaction. <strong><span style="color: red;">Historically, a Fed rate-hiking&#160;</span></strong><strong><span style="color: red;">cycle preceded most recessions since World War II, with recessions occurring&#160;</span></strong><strong><span style="color: red;">only after the Fed moved rates into contractionary territory</span></strong>. Arguably the Fed did&#160;this only after it was convinced the economy was overheating and it continued&#160;hiking until the economy slowed sufficiently or went into recession. At the current&#160;juncture, core inflation has remained below the Fed’s target of 2% for the last 10&#160;years and several Fed officials have argued for symmetry in inflation outcomes&#160;around the target, i.e., to tolerate inflation above 2%. It is thus likely that the Fed&#160;will welcome the rise in inflation for now and simply stick to its current guidance,&#160;possibly moving it up modestly.</span></blockquote>
<blockquote class="tr_bq"><strong><span style="font-family: inherit;">How high will inflation go? If inflation expectations remain range bound, core&#160;PCE inflation will stay within its narrow band of 1-2.3% in which it has been for&#160;the last 23 years</span></strong></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>Outside the Great Inflation of 1968-1995, core PCE inflation has&#160;</strong><strong>remained in a remarkably narrow band</strong> (Six Myths About Inflation, Oct&#160;2017). The period since 1996 encompassed 3 business cycles that saw&#160;unemployment fluctuate between 3.8% and 10%; the dollar rise and fall&#160;by 40% more than once; oil prices rise 7-fold and almost completely&#160;reverse. Yet inflation remained in a narrow band unusual for an economic&#160;time series. Indeed, with a standard deviation of 35 bps, much of the&#160;range of variation in inflation since 1996 cannot be differentiated from the&#160;normal noise inherent in macro data.</span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>The stability of inflation across large business- dollar- and oil-cycles&#160;in our view reflects the stability of inflation expectations which are the&#160;</strong><strong>only driver of inflation over the long run.</strong> Inflation expectations have been&#160;stable since the mid-1990s, fluctuating for most of the last 23 years in a&#160;tight 50bps range and for most of it in an even narrower 30bps range.&#160;Following the dollar and oil shocks of 2014-2015, inflation expectations&#160;fell out of and are still 20bps below this range and 50bps below average.&#160;Absent large unexpected and persistent shocks, inflation expectations&#160;evolve slowly. It has in fact been difficult for policy makers to effect&#160;changes in inflation expectations as the recent experience of Japan and&#160;&#160;the 10-year miss on the core PCE inflation target in the US illustrate (Six Myths About Inflation, Oct 2017).</span></blockquote>
<blockquote class="tr_bq"><strong><span style="font-family: inherit;">What about all the stimulus? The impact of the stimulus will follow a pickup in growth with long lags (1½ years)</span></strong></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>It is well known that inflation responds with long lags to growth, a tightening labor market and the dollar.</strong> Consider that the correlation between real GDP growth and core CPI inflation is a modest positive 5%. But when GDP growth is lagged by 6 quarters, the correlation jumps to a much stronger 80%. The lagged relationship implies that a sustained 1pp increase in GDP growth raises core inflation by 20bps after 1½ years. Our house forecast for GDP growth which is above consensus implies GDP growth of near 3% and core inflation peaking around 2.2% in 2020.</span></blockquote>
<blockquote class="tr_bq"><span style="font-family: inherit;">■ <strong>Growth outcomes significantly above our house view would need to materialize and sustain to raise inflation above and outside the band of the last 23 years.</strong> Moreover there would be plenty of lead time with growth needing to sustain at high levels for a prolonged period (1½ years) before it moved inflation up."&#160; - source Deutsche Bank</span></blockquote>
<span style="font-family: inherit;">As we repeated in numerous conversation, for a bear market to materialize you would need a significant pick-up in inflation for your "buckling" to occur and to lead to a significant repricing of risky asset prices such as equities and US High Yield. But what is very interesting to us is that the buildup in the trade war rhetoric coming from the US could be a harbinger for higher inflation down the line given that companies would most likely increase their prices with rising import prices that would be passed on already stretched consumers thanks to solid use of the credit cart (nonrevolving credit).&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">In our recent conversation "<a href="http://macronomy.blogspot.com/2018/01/macro-and-credit-bracket-creep.html">Bracket creep</a>", which describes the process by which inflation pushes wages and salaries into higher tax brackets, leading to a fiscal drag situation, we indicated that with declining productivity and quality with wages pressure building up, this could mean companies, in order to maintain their profit margins would need to increase their prices. To repeat ourselves "Protectionism", in our view, is inherently inflationary in nature.&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">To preserve corporate margins, output prices will need to rise, that simple, and it is already happening. This can have a significant impact on earnings particularly when the S&amp;P 500 Net Income Margins LTM is at close to record levels as indicated in Deutsche Bank's note:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation and earnings</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>Is inflation bad for margins and earnings? Historically, higher inflation has&#160;</strong><strong>been associated with higher margins and strong earnings growth</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong>Conceptually, higher inflation is ambiguous</strong>. From a pricing vs cost perspective, whether higher inflation leads to higher or lower margins depends on the relative strengths of price vs wage and other input cost inflation. It depends on the relative importance of variable vs fixed costs. And on the extent to which corporates can increase productivity in response to cost pressures. It is notable that while markets seem to have been surprised by the recent uptick in wage inflation, corporates have been noting it for at least a year. Finally, inflation does not occur in a vacuum. The drivers of higher inflation matter and when it reflects strong growth, it implies not only higher sales but operating leverage from fixed costs can raise margins and amplify the impact on earnings.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong>Historically, the empirical evidence is unambiguous</strong>. Higher inflation was clearly associated with higher margins and strong earnings growth.</span></blockquote>
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<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">With the S&amp;P 500 Net Income Margins LTM close to record levels and with the recent rise in prices operated by companies recently, it remains to be seen how long can margin levels remain this elevated. Sure, the fiscal boost provided by the US government should provide additional support yet the big question for us is relative to the US consumer and its sensitivity to rising prices as we discussed in the final point of our conversation "<a href="http://macronomy.blogspot.com/2018/02/macro-and-credit-harmonic-tremor.html">Harmonic tremor</a>". Have we seen peak "Consumer confidence" and peak PMIs recently? One thing for certain is that&#160;Citigroup’s US Economic Surprise Index (CESIUSD Index) as an indicator of economic momentum has started to "buckle" recently. There is a clear relationship between the CITI's Economic Surprise Index and the Fed's monetary policy.&#160;When the Fed is in tightening mode, good news such as rising inflation expectations is generally seen as bad news.&#160;In spread terms, only high yield is sensitive to macro surprises. Moreover, the response of high yield spreads to macro surprises is "monotonic" in ratings: the lower the rating, the stronger the response. In our conversation "<a href="http://macronomy.blogspot.com/2018/02/macro-and-credit-shot-across-bows.html">A shot across the bows</a>", we indicated the following when it comes the Citi Economic Surprise Index (CESI). It could potentially indicate that economic fundamentals are trading ahead of themselves and could portend some credit spreads widening in the near future given there is a reasonably strong relationship between the inverse of Citigroup Economic Surprise Index and both the IG CDX and HY CDX. So all in all, you want to watch what the CESI does in the coming weeks and months.&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">But moving back to the impact of the "Big Bad Wolf" aka inflation on equity multiples, we read with interest as well the other part of Deutsche Bank's report on the impact inflation can have:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation and equity multiples</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><strong><span style="font-family: inherit;">Does higher inflation mean lower equity multiples? By how much? A 1 pp rise in inflation compresses equity multiples by 1 point or a decline in prices of around 5% from recent pre-correction levels</span></strong></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ The correlation between bond yields and equities depends on the driver: inflation (-) or real rates (+). Contrary to popular notions that higher bond yields mean lower equities, the historical relationship between bond yields and equities has been ambiguous (Long Cycles In The Bond-Equity Correlation, May 2014). Instead, the impact of higher yields on equities depends on whether they reflect higher inflation (-) which has always been negative for equities; or whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels (greater than 4%--seen only once during the Volcker disinflation) (Do Higher Rates Mean Lower Equity Multiples? Sep 2014).</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ <strong><span style="color: red;">Why is higher inflation negative for equity valuations? When inflation moves up, the hurdle rate for all nominal investments moves up and in turn bond yields and earnings yields (inverse of the equity multiple) move up</span></strong>.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ A 1pp rise in inflation compresses multiples by 1 point. A majority (70%) of the historical variation in the S&amp;P 500 multiple is explained by its drivers: earnings/normalized levels (-); payouts (+); rates broken up into inflation (-) and real rates (+); and macro vol (-). Our estimates imply that a 1pp rise in inflation lowers the equity multiple by 1 point or a 5% decline in prices from the recent peak. Our house view and the consensus sees a somewhat smaller rise in inflation over the next 2 years. These ranges of increases in inflation imply a modest pullback in equities that would put it within the bands of normal 3-5% pullbacks that have historically occurred every 2-3 months.</span></blockquote>
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<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-0V9vJElFsW4/Wpbh9hbEWdI/AAAAAAAATd8/pwZbk-r3EIY1O9VIOFJ4JxepqE6-bpKzwCLcBGAs/s1600/DB%2B-%2BThe%2Bsame%2Bis%2Btrue%2Bin%2Bequities%2Bfor%2Bearnings%2Byields.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-0V9vJElFsW4/Wpbh9hbEWdI/AAAAAAAATd8/pwZbk-r3EIY1O9VIOFJ4JxepqE6-bpKzwCLcBGAs/s320/DB%2B-%2BThe%2Bsame%2Bis%2Btrue%2Bin%2Bequities%2Bfor%2Bearnings%2Byields.jpg" width="320" height="191" border="0" data-original-height="350" data-original-width="584" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-q3IVF-hjqps/WpbiUWjKKZI/AAAAAAAATeE/LvKYdiIASBcVjVe36EnR_MkBXnAWYCfTwCLcBGAs/s1600/DB%2B-%2BInflation%2Bhas%2Bbeen%2Bconsistently%2Bnegative%2Bfor%2Bequity%2Bmultiples%2Bbut%2Bonly%2Bmodestly%2Bso%2Bwhen%2Bit%2Bhas%2Bbeen%2Blow%2Band%2Bstable%2Bas%2Bit%2Bhas%2Bfor%2Bthe%2Blast%2B20%2Byears.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-q3IVF-hjqps/WpbiUWjKKZI/AAAAAAAATeE/LvKYdiIASBcVjVe36EnR_MkBXnAWYCfTwCLcBGAs/s320/DB%2B-%2BInflation%2Bhas%2Bbeen%2Bconsistently%2Bnegative%2Bfor%2Bequity%2Bmultiples%2Bbut%2Bonly%2Bmodestly%2Bso%2Bwhen%2Bit%2Bhas%2Bbeen%2Blow%2Band%2Bstable%2Bas%2Bit%2Bhas%2Bfor%2Bthe%2Blast%2B20%2Byears.jpg" width="320" height="218" border="0" data-original-height="400" data-original-width="585" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-HY8kAcjrY3o/Wpbikol2HuI/AAAAAAAATeI/oS2a83YR3xQWpCPV3mbEU2-TYHTZiaHLgCLcBGAs/s1600/DB%2B-%2BHistorically%2Bequity%2Bmultiples%2Bhave%2Bbeen%2Bpositively%2Bcorrelated%2Bwith%2Breal%2Brates.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-HY8kAcjrY3o/Wpbikol2HuI/AAAAAAAATeI/oS2a83YR3xQWpCPV3mbEU2-TYHTZiaHLgCLcBGAs/s320/DB%2B-%2BHistorically%2Bequity%2Bmultiples%2Bhave%2Bbeen%2Bpositively%2Bcorrelated%2Bwith%2Breal%2Brates.jpg" width="320" height="223" border="0" data-original-height="412" data-original-width="589" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-9FnsZsa6bmE/Wpbi7dkUgtI/AAAAAAAATeU/yi5j6pjlmtscuSC2Z1DulT_hcUFRh5gAwCLcBGAs/s1600/DB%2B-%2BOur%2Bmodel%2Bof%2Bthe%2Bequity%2Bmultiple%2Bindicates%2Bthat%2Ba%2B1%2Bpercentage%2Bpoint%2Brise%2Bin%2Binflation%2Bshould%2Btake%2Boff%2B1%2Bmultiple%2Bpoint%2Bwhich%2Bis%2B-5pct%2Bin%2Bprices%2Bat%2Bthe%2Brecent%2Bpeak.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-9FnsZsa6bmE/Wpbi7dkUgtI/AAAAAAAATeU/yi5j6pjlmtscuSC2Z1DulT_hcUFRh5gAwCLcBGAs/s320/DB%2B-%2BOur%2Bmodel%2Bof%2Bthe%2Bequity%2Bmultiple%2Bindicates%2Bthat%2Ba%2B1%2Bpercentage%2Bpoint%2Brise%2Bin%2Binflation%2Bshould%2Btake%2Boff%2B1%2Bmultiple%2Bpoint%2Bwhich%2Bis%2B-5pct%2Bin%2Bprices%2Bat%2Bthe%2Brecent%2Bpeak.jpg" width="320" height="233" border="0" data-original-height="432" data-original-width="593" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">Obviously from a "buckling" perspective the big question is whether higher yields reflect higher real rates (+) which have always been positive for equities until real rates reached very high levels, or, are they reflecting a higher inflation risk, in which case the repricing could be more severe as the Fed would probably step up on its hiking gear. For the positive momentum to hold and goldilocks environment to continue, you would need inflation and growth not running too hot, so that the Fed can gradually hike rather than stepping up its hiking pace. This is as well clearly highlighted by Charlie Bilello from Pension Partners in his blog post from the 15th of February entitled "<a href="https://pensionpartners.com/inflation-deflation-and-stock-market-returns/">Inflation, deflation and stock returns</a>".</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">Again, it is a matter of "velocity" in the movement. An exogenous factor such as a geopolitical event that would trigger a sudden and rapid rise in oil prices would of course upset the situation and be much more negative for equities as we saw with the huge rise in oil prices prior to the Great Financial Crisis (GFC) of 2008.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">One might therefore rightly ask if indeed inflation could be a leading indicator for recession. This is also a point which has been discussed in Deutsche Bank's very interesting note:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation as a leading indicator of recession</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>Is the inflection in inflation a leading indicator of the end of the cycle? How&#160;</strong><strong>long is the lead? On average 3 years, but the Fed’s reaction is key</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">With an average correction in equities of 21% around recessions, the timing of the next one is obviously key. <strong><span style="color: red;">If the recent uptick marks the typical mid- to latecycle inflection up in inflation, how long after did the next recession typically occur? On average 3 years, which would put it in late 2020</span></strong>. But the timing is likely determined critically by the Fed’s reaction. Historically, a Fed rate-hiking cycle preceded most recessions since World War II, with recessions occurring only after the Fed moved rates into contractionary territory. Arguably the Fed did this only after it was convinced the economy was overheating and it continued hiking until the economy slowed sufficiently or went into recession. At the current juncture, core inflation has remained below the Fed’s target of 2% for the last 10 years and several Fed officials have argued for symmetry in inflation outcomes around the target, i.e., to tolerate inflation above 2%. It is thus likely that the Fed will welcome the rise in inflation for now and simply stick to its current guidance, possibly moving it up modestly.</span></blockquote>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-9RBZVEyFGUw/Wpb6wVTwt8I/AAAAAAAATeo/8ojZ2KWrSGc-XTe3y8UBzDciXIY7LdYxQCLcBGAs/s1600/DB%2B-%2BA%2Bcyclical%2Bincrease%2Bin%2Binflation%2Bhas%2Bled%2Bprior%2Brecessions%2Bby%2Ban%2Baverage%2Bof%2B3%2Byears.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-9RBZVEyFGUw/Wpb6wVTwt8I/AAAAAAAATeo/8ojZ2KWrSGc-XTe3y8UBzDciXIY7LdYxQCLcBGAs/s320/DB%2B-%2BA%2Bcyclical%2Bincrease%2Bin%2Binflation%2Bhas%2Bled%2Bprior%2Brecessions%2Bby%2Ban%2Baverage%2Bof%2B3%2Byears.jpg" width="320" height="226" border="0" data-original-height="418" data-original-width="588" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-C3hnbAlhO9k/Wpb7Bxf5fOI/AAAAAAAATes/vAIML43z4Ecu9OfYvUezqNGRu0fTip2TwCLcBGAs/s1600/DB%2B-%2BThe%2BFed%2527s%2Breaction%2Bto%2Brising%2Binflation%2Bis%2Bkey.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-C3hnbAlhO9k/Wpb7Bxf5fOI/AAAAAAAATes/vAIML43z4Ecu9OfYvUezqNGRu0fTip2TwCLcBGAs/s320/DB%2B-%2BThe%2BFed%2527s%2Breaction%2Bto%2Brising%2Binflation%2Bis%2Bkey.jpg" width="320" height="242" border="0" data-original-height="444" data-original-width="586" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">It is most likely that the Fed's hiking process was due to its fear of not being behind the curve when it comes to rising inflation. Yet with a yield curve flattening and loose financial conditions in conjunction with renewed fear of a trade war that would entail pricing pressure and imported inflation with a bear market in the US dollar, there is indeed a big risk in having the Fed having to move at a more rapid pace than it would like to. The balancing act of the Fed is incredibly difficult but, it boast a first mover advantage other the likes of the ECB and the Bank of Japan. Volatility might have been repressed but in all honesty, it is in Europe where the repression has been the most acute as it can be seen in government bond yields.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">The big question surrounding the potential lethality of the "Big Bad Wolf" aka inflation lies in the velocity of inflation expectations. On that specific point, Deutsche Bank gives us additional food for thoughts in their lengthy note:</span></div>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">"<strong>Inflation and inflation expectations</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;"><strong>How high will inflation go? If inflation expectations remain range bound, core&#160;</strong><strong>PCE inflation will stay within its narrow band of 1-2.3% in which it has been for&#160;</strong><strong>the last 23 years</strong></span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ Outside the Great Inflation of 1968-1995, core PCE inflation has remained in a remarkably narrow band (Six Myths About Inflation, Oct 2017). The period since 1996 encompassed 3 business cycles that saw unemployment fluctuate between 3.8% and 10%; the dollar rise and fall by 40% more than once; oil prices rise 7-fold and almost completely reverse. Yet inflation remained in a narrow band unusual for an economic time series. Indeed, with a standard deviation of 35 bps, much of the range of variation in inflation since 1996 cannot be differentiated from the normal noise inherent in macro data.</span></blockquote>
<blockquote class="tr_bq" style="text-align: justify;"><span style="font-family: inherit;">■ The stability of inflation across large business- dollar- and oil-cycles in our view reflects the stability of inflation expectations which are the only driver of inflation over the long run. Inflation expectations have been stable since the mid-1990s, fluctuating for most of the last 23 years in a tight 50bps range and for most of it in an even narrower 30bps range. Following the dollar and oil shocks of 2014-2015, inflation expectations fell out of and are still 20bps below this range and 50bps below average. Absent large unexpected and persistent shocks, inflation expectations evolve slowly. It has in fact been difficult for policy makers to effect changes in inflation expectations as the recent experience of Japan and the 10-year miss on the core PCE inflation target in the US illustrate (Six Myths About Inflation, Oct 2017).</span></blockquote>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://2.bp.blogspot.com/-Uxw5i0cj_0A/WpcL3kqeDqI/AAAAAAAATfA/iypf6AqDNTY3zWrDBt_JX8kmOvIz9y-OwCLcBGAs/s1600/DB%2B-%2BCore%2BInflation%2Bhas%2Bbeen%2Bremarkably%2Bsteady%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg"><span style="font-family: inherit;"><img src="https://2.bp.blogspot.com/-Uxw5i0cj_0A/WpcL3kqeDqI/AAAAAAAATfA/iypf6AqDNTY3zWrDBt_JX8kmOvIz9y-OwCLcBGAs/s320/DB%2B-%2BCore%2BInflation%2Bhas%2Bbeen%2Bremarkably%2Bsteady%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg" width="320" height="210" border="0" data-original-height="388" data-original-width="589" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://4.bp.blogspot.com/-QBcNCmJpyk4/WpcMFGKsT3I/AAAAAAAATfE/YSMb1lEXZ_Aaql7_Jgnaii6uJZYohaQ9QCLcBGAs/s1600/DB%2B-%2Bmassive%2Bswings%2Bin%2Bunemployment.jpg"><span style="font-family: inherit;"><img src="https://4.bp.blogspot.com/-QBcNCmJpyk4/WpcMFGKsT3I/AAAAAAAATfE/YSMb1lEXZ_Aaql7_Jgnaii6uJZYohaQ9QCLcBGAs/s320/DB%2B-%2Bmassive%2Bswings%2Bin%2Bunemployment.jpg" width="320" height="212" border="0" data-original-height="388" data-original-width="584" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-sAdeVoZkr2o/WpcMRU_8ApI/AAAAAAAATfI/_qKr82__tSIsCQWtJIw55XO448GOiu98QCLcBGAs/s1600/DB%2B-%2B40pct%2Bappreciation%2Band%2Bdepreciation%2Bof%2Bthe%2Bdollar.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-sAdeVoZkr2o/WpcMRU_8ApI/AAAAAAAATfI/_qKr82__tSIsCQWtJIw55XO448GOiu98QCLcBGAs/s320/DB%2B-%2B40pct%2Bappreciation%2Band%2Bdepreciation%2Bof%2Bthe%2Bdollar.jpg" width="320" height="212" border="0" data-original-height="389" data-original-width="587" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://3.bp.blogspot.com/-v-f5YUqmIGE/WpcMeaJB2xI/AAAAAAAATfM/IgtMHaVdn6MHeNp1-nzHHk_tW5VPfP0GwCLcBGAs/s1600/DB%2B-%2B7%2Bfold%2Bincrease%2Bin%2Boil%2Bpricesz%2Band%2Btheir%2Breversal.jpg"><span style="font-family: inherit;"><img src="https://3.bp.blogspot.com/-v-f5YUqmIGE/WpcMeaJB2xI/AAAAAAAATfM/IgtMHaVdn6MHeNp1-nzHHk_tW5VPfP0GwCLcBGAs/s320/DB%2B-%2B7%2Bfold%2Bincrease%2Bin%2Boil%2Bpricesz%2Band%2Btheir%2Breversal.jpg" width="320" height="211" border="0" data-original-height="387" data-original-width="586" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-51_fE0MEjdY/WpcMt8RQn5I/AAAAAAAATfU/SDdts3d8CC4RJY3C0CvfhdV7tiu0v1FcQCLcBGAs/s1600/DB%2B-%2Bstability%2Bin%2Bactual%2Binflation%2Breflects%2Bthat%2Bin%2Binflation%2Bexpectations.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-51_fE0MEjdY/WpcMt8RQn5I/AAAAAAAATfU/SDdts3d8CC4RJY3C0CvfhdV7tiu0v1FcQCLcBGAs/s320/DB%2B-%2Bstability%2Bin%2Bactual%2Binflation%2Breflects%2Bthat%2Bin%2Binflation%2Bexpectations.jpg" width="320" height="216" border="0" data-original-height="396" data-original-width="585" /></span></a></div>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-kNmZ2AGIBK8/WpcM7vaNfmI/AAAAAAAATfc/RsHj8dHXUswqahCv7haKeJyWGuetrNbgACLcBGAs/s1600/DB%2B-%2Binflation%2Bexpectations%2Bfluctuations%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg"><span style="font-family: inherit;"><img src="https://1.bp.blogspot.com/-kNmZ2AGIBK8/WpcM7vaNfmI/AAAAAAAATfc/RsHj8dHXUswqahCv7haKeJyWGuetrNbgACLcBGAs/s320/DB%2B-%2Binflation%2Bexpectations%2Bfluctuations%2Bfor%2Bthe%2Blast%2B23%2Byears.jpg" width="320" height="238" border="0" data-original-height="436" data-original-width="586" /></span></a></div>
<div style="text-align: center;"><span style="font-family: inherit;">- source Deutsche Bank</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">As long as growth and inflation doesn't run not too hot, the goldilocks environment could continue to hold for some months provided, as we mentioned above there is no exogenous factor from a geopolitical point of view coming into play which would trigger an acceleration in oil prices. Though, in similar fashion to volatility, the game can continue to be played provided "implicit inflation" or "inflation expectations" remain below "realized" inflation. In similar fashion to the demise of the short-vol trade, if there is a change in the 23 years narrative and suddenly "realized" inflation is above "expectations" then obviously this would be another grain of sand that could trigger some new avalanches in financial markets. We are not there yet we think.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">Finally in our final chart below, given the late stage of the credit game, we think it is becoming essential to track any changes in credit availability in the months ahead given our loose financial conditions have been and the flattening of the US yield curve.</span></div>
<div style="text-align: justify;"><span style="font-family: inherit;">&#160;</span></div>
<div style="text-align: justify;">
<ul style="background-color: white; line-height: 20.8px;">
<li style="line-height: 20.8px; text-align: justify;"><span style="line-height: 20.8px;"><span style="font-family: inherit;">Final chart - Afraid of buckling? Watch credit availability</span></span></li>
</ul>
</div>
<div style="text-align: justify;"><span style="font-family: inherit;">We have long posited that "<span style="text-align: left;">Credit availability" is essential and a good predictor of upcoming defaults as far as US High Yield is concerned. T</span><span style="text-align: left;">he most predictive variable for default rates remains credit availability and if credit availability in US dollar terms vanishes, it could portend surging defaults down the line. The quarterly&#160;</span></span><span style="text-align: left;">Senior Loan Officer Opinion Surveys (SLOOs) published by the Fed are very important to track. T</span><span style="text-align: left;">he SLOOS report does a much better job of estimating defaults when they are being driven by a systemic factor, such as a turn in business cycle or an all-encompassing macro event. T</span>ightening in credit standards in conjunction with rate hikes will eventually weight on High Yield, and we are already seeing some fund outflows in the asset class (15th consecutive week). Our final chart comes from CITI Global Economics View note from the 23rd of February entitled "How Could Equity Sell-offs Affect Global Growth" and displays US Non-financial corporations Debt Outstanding as a percentage of GDP and AAA-BBB Effective Yield Spread for Industrial Corporate Bonds (1997-2017):</div>
<blockquote class="tr_bq" style="text-align: justify;">"<strong>What to watch?</strong>Given that a tightening in financial conditions poses a risk to the outlook, we would monitor:<br />
<ul>
<li>The durability of the sell-off: that’s rather obvious – a brief period of financial tightening is unlikely to have any material implications on the real economy.</li>
<li>Credit availability and credit spreads: given the stage of the business cycle, prospects for higher inflation, and lower monetary accommodation in advanced economies, we think credit availability and credit spreads amid high leverage across some sectors and economies are key indicators to assess whether financial conditions are starting to feed through to economic activity (Figure 6).</li>
</ul>
</blockquote>
<p>&#160;</p>
<div class="separator" style="clear: both; text-align: center;"><a style="margin-left: 1em; margin-right: 1em;" href="https://1.bp.blogspot.com/-pGT2udVu_hQ/WpcXEnWGZwI/AAAAAAAATf0/O46qxsr74TUSZQJw1hslsZB2XBinBJ8oQCLcBGAs/s1600/CITI%2B-%2BUS%2Bnon%2Bfin%2Bas%2Bpct%2Bof%2BGDP%2BVS%2BEffective%2BYield%2BSpread%2Bfor%2BIndustrial%2BCorp%2BBonds%2B1997-2017.jpg"><img src="https://1.bp.blogspot.com/-pGT2udVu_hQ/WpcXEnWGZwI/AAAAAAAATf0/O46qxsr74TUSZQJw1hslsZB2XBinBJ8oQCLcBGAs/s1600/CITI%2B-%2BUS%2Bnon%2Bfin%2Bas%2Bpct%2Bof%2BGDP%2BVS%2BEffective%2BYield%2BSpread%2Bfor%2BIndustrial%2BCorp%2BBonds%2B1997-2017.jpg" border="0" data-original-height="303" data-original-width="269" /></a></div>
<blockquote class="tr_bq" style="text-align: justify;">
<ul>
<li>Sentiment measures: measures of household and business sentiment are at very high levels across most AEs. A decline in sentiment would probably be a precursor to some moderation in spending intentions, even though the relationship between consumer sentiment and real consumption appears to have declined in recent years." - source CITI</li>
</ul>
</blockquote>
<div style="text-align: justify;">If further loading of the credit mouse trap will eventually cause significant and somewhat unpredictable deformations, possibly leading to complete loss of the member's load-carrying capacity, low recoveries and significant losses for credit investors, when it comes to assessing a potential "buckling" in the credit markets, apart from the "Big Bad Wolf" aka inflation being the enemy of volatility and leverage, credit availability is an essential part of the credit cycle.</div>
<div style="text-align: justify;">&#160;</div>
<div style="text-align: justify;"><em>Stay tuned!</em></div>
<div style="text-align: justify;">&#160;</div>
<div style="text-align: justify;">&#160;</div>
<div style="text-align: justify;">&#160;</div>
<div style="text-align: justify;">Courtesy of <a href="https://macronomy.blogspot.com/2018/02/macro-and-credit-buckling.html" target="_blank" rel="noopener">Macronomy</a></div>
</div>Tactically Cautious On Global Equitieshttp://stockbuz.net/articles/tactically-cautious-on-global-equities2016-10-14T16:55:27.000Z2016-10-14T16:55:27.000ZStockBuzhttp://stockbuz.net/members/1t2xbcvddkrir<div><p>A December Fed rate hike, uncertainty regarding the U.S. presidential elections, weak earnings growth, diminished buyback activity and concerns about European banks pose near-term risks to global equities.&nbsp; <em>Comments in italics are mine.</em></p>
<p><a href="http://blog.bcaresearch.com/wp-content/uploads/2016/10/DIN-20161011-091957.png"><img src="http://blog.bcaresearch.com/wp-content/uploads/2016/10/DIN-20161011-091957.png" alt="DIN-20161011-091957" class="alignnone size-full wp-image-13419" width="547" height="601"></a></p>
<p>The summer rally has left equity valuations looking stretched. The median U.S. stock now trades at a higher P/E ratio than even at the 2000 peak. The Shiller P/E ratio stands at 27, but would be 37 if profit margins over the preceding ten years had been what they were in the 1990s. The fact that interest rates are low gives stocks some support, but with the Fed likely to hike rates in December, that tailwind will begin to fade.</p>
<p>Lackluster earnings growth remains another concern. S&amp;P 500 and economy-wide profit margins have rolled over. Granted, the collapse in profits in the energy sector has been the major culprit, and this headwind should wane if oil prices edge higher over the next 12 months, as we expect. Nevertheless, faster wage growth and a firm U.S. dollar will limit any recovery in margins. A Trump victory could also trigger a trade war, while a Clinton triumph could mean higher taxes and increased regulatory burdens. &nbsp;<em>Let's not forget further spotlight on biotech and drug prices.</em> Both will be headwinds for the corporate sector.&nbsp; <em>Let us also not ignore the "hard Brexit" tensions and $DB worries across the pond as well as China slowdown in exports.&nbsp; When will they ever hit bottom?&nbsp; It all makes you want to be long USD and short the Euro, GBP and CNY.&nbsp; Oh btw, if the USD continues to benefit, what will that do to the energy sector which has been so hot in 2016?&nbsp; Can OPEC's talk of holding production hold true when so many producing countries are not OPEC members?&nbsp; What weight will that place on SPX?</em></p>
<p><em><a href="http://storage.ning.com/topology/rest/1.0/file/get/1291316?profile=original" target="_self"><img src="http://storage.ning.com/topology/rest/1.0/file/get/1291316?profile=RESIZE_480x480" class="align-full" width="400" height="366"></a></em></p>
<p>Bottom Line: Our <em>Global Investment Strategy</em> service believes global equities are vulnerable to a near-term correction.</p>
<p><em>This does not mean we can't see individual stocks climb higher on news or their potential implied price targets however "bears" tend to choose their entry levels as I have.&nbsp; Last Summers "breakout' in SPX did not exceed 4% of the prior level and is therefore suspect in my book.&nbsp; I am short in certain names (LULU, BIDU, TSLA to name a few) and will establish more as needed.&nbsp; I am still long some equity names at the same time; mostly anticipating higher rates.</em></p>
<p>Courtesy of <a href="http://blog.bcaresearch.com/tactically-cautious-on-global-equities" target="_blank">BCA Research</a></p></div>Are Profit Margins Sustainable: RBChttp://stockbuz.net/articles/are-profit-margins-sustainable-rbc2014-10-30T21:59:06.000Z2014-10-30T21:59:06.000ZStockBuzhttp://stockbuz.net/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290921?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290921?profile=original" width="422"></a>Stock markets have enjoyed a banner half-decade, forcefully reclaiming the ground lost to the financial crisis, and then some. This vigorous performance has occurred thanks, above all else, to two key enablers: surging earnings and recovering valuations. On the surface, there is nothing especially questionable about either. Earnings naturally rise as economies grow, and valuations recover as risk aversion fades.</p>
<p>However, a closer examination reveals a significant vulnerability within this cozy equation. Corporate earnings growth has been, in a sense, too good – persistently outpacing both revenues and the economy. This has driven profit margins to multi-decade highs.</p>
<p>Worryingly, profit margins have long been assumed to be mean-reverting, arguing that these juicy gains may eventually have to reverse. Such a scenario would necessitate an eye-watering one-third decline in the S&amp;P 500. With stakes as big as these, a clear sense of the downside risk is imperative. This report evaluates the seriousness of the threat by seeking to understand the forces that have propelled profit margins higher, and their likely direction in the future. In so doing, we find that a large number of previously favorable profit-margin enablers are on the cusp of reversing, including the advantages of low borrowing costs, deleveraging, soft wage growth and deferred capital investment. The decline in these drivers suggests that profit margins could suffer.</p>
<p>Fortunately, there are a number of under-appreciated structural forces that continue to support high (and in some cases, even rising) profit margins, including globalization, automation and a compositional shift toward higher-margin sectors.</p>
<p>Grab a cup of coffee (maybe two), sit back and read the full <a href="http://media.rbcgam.com/pdf/economic-compass/rbc-gam-economic-compass-profit-margins-201409.pdf" target="_blank">RBC PDF here.</a></p></div>The State Of Buyback Programshttp://stockbuz.net/articles/the-state-of-buyback-programs2014-10-14T18:12:07.000Z2014-10-14T18:12:07.000ZStockBuzhttp://stockbuz.net/members/1t2xbcvddkrir<div><p>Stock repurchase programs as well as dividends, are a great way to "return value to the shareholder" and also a way to "prop up" a stock price or keep funds in the game.&#160; Unfortunately, nothing lasts forever and repurchase programs are unsustainable longer term.&#160; At some point the market must heed the fundamentals, earnings growth and if margins contract, the positive effect of buybacks is lessened. &#160; This from one of my favs, <a href="http://blog.variantperception.com/2014/10/10/pillars-of-equity-rally-fall-away" target="_blank">Variant Perception</a></p>
<div style="background-color: #f3f3f3; padding: 10px;">
<blockquote>
<p style="text-align: center; color: #000000;"><span class="font-size-3">Stock buybacks have been an important feature of the equity rally.&#160; Companies have used low rates and easy credit to borrow money and used it to buy their own shares back.&#160; An identity for a company’s share price is: S = (revenues * margins * P/E) / # of shares.&#160; Buying back shares reduces the denominator in this equation, thus (all other things equal) boosting the stock price.&#160; But buybacks are waning; the chart below shows a 27% decline in buybacks between 1Q14 and 2Q14.&#160; YoY it is down 1.6%.&#160; (Interestingly, the peak in buybacks was also the peak in the US stock market in 2007.)</span></p>
<p style="text-align: center;"><a rev="0" href="http://blog.variantperception.com/wp-content/uploads/2014/10/img1.png" class="pirobox_gall_21237 first" rel="gallery"><img class="aligncenter size-medium wp-image-21238" src="http://blog.variantperception.com/wp-content/uploads/2014/10/img1-300x295.png" alt="img1" height="295" width="300" /></a></p>
<p style="text-align: center;"><span class="font-size-3" style="color: #000000;">Source: Horan Capital Advisors</span></p>
<p style="text-align: center;"><span class="font-size-3" style="color: #000000;">Revenues are closely linked to nominal GDP, and our US leading indicator sees this as lackluster at best going forward.&#160; Margins we have discussed in previous reports.&#160; Our leading indicator for wages has turned up, and this tends to lead to lower profit margins.&#160; Finally, multiple expansion has been a big driver of equity returns in 2012 and 2013, accounting for about 75% of returns.&#160; However, already in 2014 it is slipping, down from 67% in May to under&#160;50% today (chart below).&#160; In short, the pillars of equity performance are crumbling, making it difficult to see how equities can remain supported between now and into early next year.</span></p>
<p style="text-align: center;"><a rev="1" href="http://blog.variantperception.com/wp-content/uploads/2014/10/img2.png" class="pirobox_gall_21237 last" rel="gallery"><img class="aligncenter wp-image-21239" src="http://blog.variantperception.com/wp-content/uploads/2014/10/img2-300x164.png" alt="img2" height="189" width="346" /></a></p>
<p style="text-align: center;">&#160;</p>
</blockquote>
</div>
</div>Funday Monday Reads May 19thhttp://stockbuz.net/articles/funday-monday-reads-may-19th2014-05-19T16:40:28.000Z2014-05-19T16:40:28.000ZStockBuzhttp://stockbuz.net/members/1t2xbcvddkrir<div><ul>
<li>
<p>MIT on unfilled job vacancies says “You do need skills, but they are within reach of most Americans.” &#160;<a href="http://newsoffice.mit.edu/2013/mit-pie-conference-0924">http://newsoffice.mit.edu/2013/mit-pie-conference-0924</a></p>
</li>
<li>
<p>Analysts return from SPLK conference with high praise <a href="http://seekingalpha.com/news/1757723-analysts-return-from-splunk-conference-with-high-praise">http://seekingalpha.com/news/1757723-analysts-return-from-splunk-conference-with-high-praise</a></p>
</li>
<li>
<p>After Fridays' close CME changed margin requirements on Coal, Crude Oil, Electricity, Equity Index, Metals, and NGLs Outrights- Effective Friday, May 16, 2014 <a href="http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv14-192.pdf">http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv14-192.pdf</a></p>
</li>
<li>
<p>Iron ore prices drop below $100 as China cools it’s housing sector and focuses on it’s consumers <a href="http://www.bloomberg.com/news/2014-05-19/iron-ore-drops-below-100-for-first-time-since-2012.html">http://www.bloomberg.com/news/2014-05-19/iron-ore-drops-below-100-for-first-time-since-2012.html</a></p>
</li>
<li>
<p>Alibaba rep tells FOX they’re looking at July or August for their IPO</p>
</li>
</ul>
</div>In The Octagon: Retailers Battle Of The Price Matchhttp://stockbuz.net/articles/in-the-octagon-retailers-price-match-battle-it-out2013-01-08T17:00:00.000Z2013-01-08T17:00:00.000ZStockBuzhttp://stockbuz.net/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290097?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290097?profile=RESIZE_320x320" width="232"></a>Growing in popularity, price matching has become the norm however I see it truly mutating and it's only going to get worse [for margins] if you ask me.&nbsp;</p>
<p>Times were when clipping coupons in the Sunday paper saved you a buck or two with some retailers offering double coupon days and Senior discount days [generally the day before the new ad was to be released] in order to clear old merchandise off the shelf.&nbsp; For those of us struggling to budget with small children, double coupon days at Venture and Zayres was a boon and if there was a Blue Light Special on ham at Kmart, we were there.&nbsp; That was the 70's and inflation was taking a bite out of our pocket.</p>
<p>Evolution slowly lead to price matching between retailers *if* you had a valid ad in hand and your checker called over the Manager for approval who would scrutinize every detail, glasses pulled down to the tip of his nose.&nbsp; This alone guaranteed you a good 5-10 minute wait [mininum], usually with a runny-nosed whining child, impatient at your heels but if you were price matching Fisher Price toys, it was well worth the wait.&nbsp; If a woman ahead of you was price matching, you rolled your eyes and beat feet for another lane.&nbsp; That was the 80s/90s.&nbsp; Jobs were plentiful and the economy was booming.</p>
<p></p>
<p>Fast forward to the 21st century and the post-credit crisis economy and <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290131?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290131?profile=RESIZE_320x320" width="228"></a>general merchandisers are struggling.&nbsp; Names such as JCPenney have struggled to adapt to the changing consumer and compete with discounters.&nbsp; Target has rushed to compete with the Walmarts and Dollar Generals of the world, scrambling to revamp their store space with groceries and one almost can hear the return of Kmart's Blue Light Special off in the distance as they [and other general merchandisers] struggle to draw in the consumer.&nbsp;</p>
<p>Today numerous grocers:</p>
<ul>
<li>Double coupon values on a <span style="text-decoration: underline;">daily basis</span> [up to a certain value].&nbsp;</li>
<li>They will also accept <span style="text-decoration: underline;">more than one coupon</span> on a purchase [many up to four coupons per item].</li>
<li>Allow coupons to be <span style="text-decoration: underline;">combined</span> [store coupon + manufacturers coupon].&nbsp;</li>
</ul>
<p></p>
<p>Websites for "couponers" such as <a href="http://www.coupons.com/" target="_blank">Coupons.com</a> and&nbsp; <a href="http://coupondivas.com/" target="_blank">CouponDivas</a> have grown with lightening speed alerting members to free offers, tutorials on how to become an extreme co<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290170?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290170?profile=RESIZE_480x480" height="143" width="375"></a>uponer as well as manufacturer coupons and rebates.&nbsp; There are "coupon installers" online and women have become quite proficient printing multiple coupons and cutting major corners.&nbsp; There are pages on Facebook for couponers and classes offered everywhere where women can learn how to "get it for free".</p>
<p></p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290222?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290222?profile=RESIZE_480x480" height="173" width="375"></a>Even my own daughter has become a crazy couponer posting this on her FB page "I got all of these for free!".&nbsp; Yes, it's viral and it's not going away.</p>
<p>I noticed that back from the dead this year were layaway programs and I'm curious to see how well they fared.&nbsp; Wouldn't be a bit surprised to see this expand further at other retailers as long as growth [and paychecks] remain low.&nbsp;</p>
<p>For certain, the new norm is virtual savings and online coupons which download to a shoppers "smart card" dangling on our key chains with retailers tracking purchases and tracking buying trends.&nbsp; Gasoline savings based on dollars spent at Meijer, Tom Thumb and others, never seen by previous generations.&nbsp; Restaurants have increased their discounting efforts offering buy one-get one free meals.&nbsp; The savings frenzy continues to expand, all to entice to the consumer to keep spending. &nbsp;</p>
<p></p>
<p>It's now commonplace to see women with a handful of ads in the checkout at<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290233?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290233?profile=RESIZE_320x320" height="155" width="309"></a> Walmart price matching anything from chicken to diapers to sneakers.&nbsp; They've evolved with the changing consumers pocketbook and strive to be your one-stop shopping place.</p>
<p></p>
<p>Today Target announced it will now price match <a href="http://seekingalpha.com/news-article/5230811-target-announces-new-year-round-price-match-of-online-retailers" target="_blank">online retailers</a> such as Walmart and BestBuy in an effort to be a one-place shop and keep you in the store.&nbsp; Certainly all others will quickly fall in step but what will this mean for margins?&nbsp; Clearly they're adapting to the new, underemployed consumer but I have to wonder how far the rubberband can stretch?&nbsp;</p>
<p>Raise your smart phone, snap a pic and price match your next car.&nbsp; Liquor store price matching online Stoli?&nbsp; Outstanding. &nbsp;Need some bridgework?&nbsp; Your Dentist will match online pricing.&nbsp; Better yet, price match medical services and prescriptions?&nbsp; Bring it.&nbsp;</p>
<p>The overall message is some will adapt and survive in this low growth environment as the world continues to de-leverage and consumers struggle with low paying wages........and others will not.&nbsp; I seriously believe it's going to become more difficult for many retailers margins before it improves.&nbsp; Only one thing is for certain; announce 4x chip days at the casino and I'm there and I'm bringing friends.</p>
<p></p>
<p></p>
<p></p></div>